• Card 12 / 16: A price ceiling will have the largest effect:
    a.) substantially below the equilibrium price
    b.) slightly below the equilibrium price
    c.) substantially above the equilibrium price
    d.) slightly above the equilibrium price

    Answer:
    a.) substantially below the equilibrium price

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Explanation:

A price ceiling prevents a price from rising above a certain level, but has no effect on prices below that level. It will have its biggest effect in creating excess demand if it is substantially below the equilibrium price. The following figure illustrates these situations. When the price ceiling is set substantially or slightly above the equilibrium price, it will have no effect on creating excess demand. The following figure illustrates these situations.

Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer.

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Microeconomics 04 Labor & Financial Markets

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Access: Public

Attribution:  Microeconomics, OpenStax-CNX Web site. Download for free at http://cnx.org/content/col11613/latest
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